Weekly Economic Summary on credit markets- Jan 15, 2010

Weekly Economic Summary - January 15, 2010



Guy Knox-
The first week of the business year (from January 4 through January 8, 2010) gave us little understanding of the underlying direction of interest rates. In fact, the lesson taught seems to have been that there really is no underlying direction. The markets’ direction, notably that of the credit markets, is very difficult to anticipate, their movements each day depending on the nature of the economic data most recently released. With that in mind, let’s look at how the markets moved last week.



 Monday (Jan. 4) began with stock markets strengthened by the prior week’s news that manufacturing orders were increasing in quantity and size in the U.S., as measured by the ISM [Institute for Supply Management] Index. At the same time, evidence of a global manufacturing rebound was declared, and the Dow Jones Industrial Average (DJIA) rode the good news to a level 1.5% higher than where it had stood the day before, while many analysts declared enthusiastically that the economy may have fully turned the corner at last.



Tuesday, then, the National Association of Realtors released its Pending Home Sales Index, a measurement of how many contracts for purchases of homes had been signed in the month of November. The index, largely because the $8,000 first-time homebuyer tax credit program expired in November (before being extended by Congress), plunged by 16%. This economic indicator, which rarely influences the overall markets greatly, seems to have single-handedly negated the declarations that the economy had “turned the corner,” and investors rushed for the safe haven of Treasury securities once again. Thus, the 10-year Treasury note’s yield fell nearly 9 basis points and there was gloom all around.



Wednesday, the markets rested and recovered, though there was a report that apartment vacancies had hit 8% in 2009, a 30-year high, and landlords in response had lowered rents by 3%.

Thursday, the rest and recuperation continued. The 10-year T-note had edged back up to 3.821%, suggesting that rates might actually be in an uptrend.






And on Friday, the weak employment report, with 85,000 jobs lost instead of the predicted 10,000, sent investors back to the shelter of safe haven investments. Indeed, the 2-year T-note yield fell below 1% to 0.936%, and the spread between the 2-year note’s yield and the 30-year bond’s yield, or the “yield curve,” widened to a record 3.74%, which suggests a coming change for interest rates, but doesn’t say much, sadly, about the nature of the change.




The markets have been moving almost entirely based on the latest news, rather than based on a consensus about where the economy is headed. Thus, the credit markets are even more difficult to predict than usual, and the wisest among us, one suspects, will not try to.

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